With strong earnings, several recent analyst upgrades, and a reverse stock split coming, now is a great time to buy General Electric (NYSE:GE) stock.
The Boston-based industrial conglomerate has been garnering a lot of attention on Wall Street lately. Investment bank Goldman Sachs named GE stock one of its “top ideas” in July, and Citibank reiterated its “buy” rating on the company’s shares.
And this was before General Electric reported better-than-expected earnings on July 27. With the diversified company’s business units, which include aviation, renewable energy and health care, performing strongly and its share price at only $13, investors would be smart to take a position at this time.
Improving Results
General Electric just reported second quarter results that beat Wall Street estimates. The company’s Q2 revenue rose to $18.28 billion from $16.81 billion in the year earlier quarter. General Electric also reported earnings per share for the second quarter of 5 cents, compared with an average analyst estimate of 3 cents.
In releasing its earnings, GE said that it received a big boost from a recovery in the global aviation industry that is increasing demand for the jet engines and aircraft parts that it manufactures.
General Electric’s aviation unit, usually its biggest cash generator, had been hurt over the past year as airlines cut back on flights and grounded aircraft during the pandemic. But GE said it expects a sustained recovery in the airline market throughout this year’s second half.
Owing to the improved outlook, General Electric reported an unexpected free cash flow of $388 million for the second quarter. Expectations were that the company would report an outflow of $400 million. Free cash flow is a sign of health for GE’s operations and its ability to repay debt.
General Electric also raised its free cash flow target for the entire year. The company said it now expects 2021 free cash flow to total $3.5 billion to $5 billion, up from its previous forecast of $2.5 billion to $4.5 billion. Should the momentum continue, General Electric said it could reach a $7 billion free cash flow target sometime next year (2022).
Bullish Sentiment
The improving financials have only added to the bullish sentiment that has gathered around GE stock in recent months. Options markets went crazy in July after it was revealed that one trader had placed a $5 million bet on GE stock after United Airlines (NASDAQ:UAL) announced that it will purchase 200 jets from Boeing (NYSE:BA), which will bolster the aircraft engines that GE’s aviation division manufactures.
The options trader is betting millions that GE’s share price will be above $15 by January of next year, which would be about 15% higher than its current price.
The company has warned that it is facing inflationary pressures due to supply bottlenecks and a rise in raw-materials costs. However, those pressures are impacting all manufacturers right now. And GE is not taking the situation lying down. The company has said it is managing the inflationary pressures through a combination of price increases, better sourcing of parts and raw materials, and higher productivity levels across its various business units. GE executives also agree with the U.S. Federal Reserve that the spike in inflation is likely to be temporary.
Upcoming Stock Split
Besides its strong financials and the enthusiasm for its stock among professional traders, GE is completed a 1:8 reverse stock split and began trading on a split adjusted basis Aug 2. This means that investors received one share for every eight they owned and the stock price increased to more than $100 following the split.
Reverse stock splits are typically done when a company is in financial straits. Companies undertake reverse splits to avoid their share price falling into penny stock territory (classified as a share price below $5) or to avoid a stock price falling below the minimum listing requirement of a certain stock exchange.
This is not the case with GE. The company’s reverse stock split is being done for cosmetic reasons as it looks bad for an industrial giant with a market capitalization of more than $100 billion to have a share price of only $13.
In the end, the reverse stock split will not impact investors in a meaningful way.
Buy GE Stock
It’s taken a long time for General Electric’s fortunes to turn around. The company has struggled since the 2008-09 financial crisis. And GE shareholders have suffered. Over the past five years, the company’s share price has fallen 59%.
In 2017, famed investor Warren Buffett, who espouses a “buy and hold forever” philosophy, threw in the towel and sold his entire stake in General Electric. However, the company looks to have finally gotten its financial house in order (paying down sizable amounts of debt) and is coming out of the pandemic stronger than it has been in years.
On the date of publication, Joel Baglole did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
